Pensions and Investments – When Some People Aren’t Ready to Give Up

The following is a guest post from MMD at IRAvs401kCentral.com. IRA vs 401k Central is a website that looks at leveraging the benefits of your investment options so that you can get the most out of your retirement savings and build the biggest nest egg possible!

The other day I was visiting a customer off site when we got into a discussion about retirement pensions and investments. He was walking with me to the front entrance and was just trying to make small talk. He asked if my work provided a good 401k plan, and I let him know that they do. He then mentioned that his company (one of the large automakers) was trying to push people into 401k plans.

Being from the older generation (this man was older than my father), he felt that it was wrong for his company to do that and voiced his disapproval. Clearly he was far more comfortable with the notion of receiving the set payment for life that a pension would bring. His reasons:

1. The pension is guaranteed for life
2. You don’t know what is going to happen in the stock market. He cited the Great Depression of 2008 as being a big example of how we could all suddenly find ourselves with half the money we saved.

Perhaps if things were the way they were 50 years ago, I might agree. Not too long ago, globalization was at a minimum, and America was the dominant leader in almost all industries. Competition was low, buying was high, and the fat cats just got fatter. Companies could operate at business models where they paid their employees handsomely both during and after employment.

Those were the times. But all things change. Better or worse, they change.

And once they do, it’s how you adapt that determines how well you’ll survive.

Pensions and Investments – Why There’s Nothing to Fear:

If for years you told me that I was going to be taken care of financially, and then suddenly I was on my own left to decide how to manage my money, I’d have some reservations too. But I think if people were given all the facts and truly shown the differences between a pension vs 401k, they would find that it may not be as raw a deal as they think.

First of all, a pension is not necessarily guaranteed for life. Although the terms may read that way when it is initially set up, there are plenty of examples of workers who invested 30 to 40 years of their lives into a pension based system only to find that at the end of the road it wasn’t there. The money had been mismanaged, dried up, held up in court, or the company had went bankrupt.

For the ones that do end up receiving one, there is also then the danger that they only receive a percentage of what they were originally promised. Again there have been dozens of stories where municipalities or companies only paid people half of what they were promised.

I don’t know about you, but I’d rather control my own density than let someone else tell me the bad news after it’s all too late.

The Pros and Cons of a 401k Plan:

It’s true that with a 401k plan there can be a lot of challenges initially:

• Not everyone knows what to invest in
• Your savings are not guaranteed
• You have the option to not invest which could be disastrous later on when you’re trying to play catch up

However, despite all that, there are some things that can make it more appealing.

You don’t have to be a financial genius. Just invest in a mixture of low cost index funds that appeal to stocks, bonds, international funds, and other assets like real estate, metals, etc. With a 401k I get the power to invest my money the way I want to – safe or risky.

You control what you invest in. There’s no reason you have to lose half your money in a stock market crash. If you’re afraid of this, just invest in safer assets like bonds or cash. Diversity can do a lot to minimize your risk.

You’re employer helps. Just because you don’t get a pension doesn’t mean your work can’t help you out. Lots of jobs offer a 401k employer match as an incentive for you to participate. You should never give up free money when someone is offering!

You control how much. Gone are the days of working a minimum of 30 years to retire. With a 401k you can invest as much as the IRS allows and plan your way to an early retirement if you wish.

Create Your Own Pension:

Suppose you absolutely wanted to get guaranteed income for life. No sweat. You always have the option of taking your 401k money and putting it towards an annuity with a solid company. Even though annuities pose their own set of issues, they will provide for a steady stream of income. Annuities are as old of a financial product as money itself, and they will continue to be for a very long time.

Readers – How do you feel about the change in trend between pensions and 401k plans?I

Kim’s Comments: Never having had a pension eligible job, I don’t really know anything other than planning for myself. My husband works for the school system, so he should get a small pension if the state doesn’t decide to cancel that at some point. I would be pretty worried if that were our only retirement planning. I’d say take it if you can get it, but don’t let that be your only plan, and don’t be afraid of choosing investments in a 401k because it’s new and might seem difficult. If you do, you could be passing up that free money MMD mentioned, and I know no one wants to do that!

28 comments

Coincidentally after I drafted this post, the nearby city of Detroit filed for bankruptcy leaving a legacy of municipal workers in limbo over whether or not they will receive even a fraction of the pension they worked so hard to receive:

This is yet again another recent and realistic example of why whether its a 401k, IRA, annuity, rental property, or whatever, we need to take our money into our own hands and build our own future with it.

Annuities could be a great investment and secure way to get an income stream for life. But there is also a lot of danger in them because they can be a shady deal if you get the wrong one. I would definitely shop around A LOT before you settle on one.

It seems like the trend of recent times is less and less jobs are available that offer pensions, and I don’t think people in their 20s or 30s expect to have a pension fund their retirement (much in the same way I think most of us don’t expect to get a piece of social security when we retire either). It’s interesting to see how the “older” generation views pensions differently.

What’s scary is how many people I meet who believe they have a pension (when they don’t) or just simply “don’t know”. How can you not know?

The older generation simply looks at pensions as something they were promised and owed. It would be like if we all the sudden made a societal change where we had to start paying to send our kids to public school. Our generation would not be able to comprehend it while the younger generation would probably just accept it.

I’ve never had a pension but it seems like a lot of them have failed or had to cut benefits after people have counted on it being there their whole lives. I would just rather save myself and know that I am responsible for it.

On the other hand, Greg’s new job has a pension and it sounds pretty attractive. We’re not counting on it though.

I can understand why he’s averse to the 401k and many are still that way. On one hand, they’ve shifted the burden to the employee, but if the person was blindly just accepting what was being invested for them then that is an issue as well. Like you said, pensions are not guaranteed and I’d much rather control what I can with a 401k.

No doubt they’ve shifted the burden, responsibility, and possible failure onto the employee. I’d be pissed if I was the older gentlemen too! But there’s no going back. That’s the way it is now and we just have to deal with it. And for me – its not so bad. I like having the control to invest in what I want and as much as I want. But I can see how some people would fear this kind of control because they don’t know what to do with it. Fortunately there are a lot of good resources out there to help them out with that.

In the beginning, I had profit sharing/pension. It was great because the (Fortune 100) company was very profitable. I then left and went to work in the computer industry. Smaller companies had 401K plans. I took my financial goals in my own hands and invested in income property. If I had a pension or a 401K, it would not matter. I think you should always take care of your own future.

I would have to agree pensions are nice if you have one but if they ever decide to get rid of it, it could leave you in a pretty bad situation. In fact I know one particular family that all they have is pensions for their retirement and to me that is just plain risky.

Agreed! People should really look at the big picture and try to mitigate areas where they are not diversified.

My wife has a pension coming up in 12 years and I feel both good and bad about it. Fortunately a large portion of our money is invested in other ways. So if anything happens the impact should only be minimal.

The employer match (if available) will always make the 401k the most appealing of all retirement options available.. But once that match is fulfilled, the tax benefits of IRAs tend to shift the tide. Pensions are almost a novelty of the past at this point.

I have a state pension which is relatively secure but I do also invest in the deferred compensation plan (403b). I understand what the man feels more security in a pension plan that is “guaranteed” but like you said, you can make your own pension plan. With 401Ks, it does shift the burden to the employees but ultimately retirement planning should be the responsibility of the employee (though the employer needs to contribute and assist in retirement planning). With pensions, I think it is too difficult and risky to “guarantee” a certain payment which is why many states will have problems paying out pensions in the future. Another thing with my pension is that I feel tied down, sort of like a golden handcuff…I know it’s not the worst problem to have, but with a 401k , you have more flexibility to the leave the job and rollover the 401k. Can’t really do that with a pension.

Are you a teacher? That’s the same exact setup as my wife (pension/403b).

It is definitely a golden handcuff of sorts. But I think you summed it up perfectly: The responsibility should always be on the employee no matter what. A pension shouldn’t be an excuse to be lazy about planning for retirement. Nor should a 401k be an excuse not to not have to contribute to a plan at all. We all have a responsibility to our older-selves to make sure that we have enough money to care for us throughout the rest of our lives.

Even my friends who are US govt employees are largely pensionless, so I think they’re definitely relics on their way out, and on the whole I think that’s better for people who are self-directed. Pensions kept you tied to one job for so long, whereas with 401Ks you have more ability to move around in your career and direct your own retirement savings.

Being able to move around from job to job if you want is one of the nice benefits of a 401k setup. But beware of “vesting” rules. You don’t want to lose all your employer contributions just because you changed jobs too soon.

I work at a private school that has a pension through a union. I invest on my own since there’s no match with our 403b and the fees are terrible. With local municipalities going bankrupt, the idea of relying on a pension just scares me. This major Detroit bankruptcy can destroy people’s retirement. The sad story of Prichard, AL (http://tinyurl.com/b8d2gpx) shows how screwed retirees are when their pension goes bankrupt. Those folks will never get their money back.

Its just really sad to think that you could work all that time and legally not get what you were promised. You are wise to invest on your own. I look at a pension as icing on the cake; not a cornerstone to the overall plan.

I wouldn’t like to be totally reliant on someone else handling my retirement, but I think some diversity might be nice. I do totally agree that you can make investing in your 401k as simple as you want it to be. It’s too bad there isn’t some better education and/or investment choices out there provided by employers, but you can make the best of what you’ve got.

I agree that things change with time for better or worse. The thing most people with pensions seem to forget is that they were invested for years with a pension. If you start working at 30 and invest in your 401k until you are ready to retire you should have a pretty nice little egg. You don’t have to be a guru like you mentioned. I like having control and if I want to invest in stocks, real estate or whatever I can. I will admit I have few friend that are police officers and firefighters and what they get after they retire does look great on paper. Not sure how its going to work though as time will tell.

Mr John Bogle of Vanguard has taught us all that investing is really just as simple and cheap as picking out an index fund and giving it a whole lot of time. At a minimum you can count on the market average, and that is not all that bad! Some people will do okay with a pension. But it would bother me that at any time a legal decision could made to reduce my income or freeze it.

Disclaimer

I am by no means a financial expert. While, I have had extensive training in vision and eye health, I have had no formal financial education. All content published here is my own personal experience or opinion. Please research your own financial decisions and act accordingly. This blog does have financial relationships with some of the services and websites that are promoted. Eyes on the Dollar is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.